Monkey business

See no evil, hear no evil, speak no evil. In last week's eChannel Intel grabbed the Channel Middle East ‘Speak No Evil’ Three Wise Monkeys Award for its complete failure to admit the part it played in creating the current credit crisis gripping the Dubai-based channel. It even managed to galvanise our chums at the chip giant into a response of sorts.

See no evil, hear no evil, speak no evil. In last week's eChannel Intel grabbed the Channel Middle East ‘Speak No Evil’ Three Wise Monkeys Award for its complete failure to admit the part it played in creating the current credit crisis gripping the Dubai-based channel.

It even managed to galvanise our chums at the chip giant into a response of sorts. This week we turn our attention to the lessons that one of the two remaining monkeys (namely distributors and resellers) must learn in light of recent events.

The authorised distribution community is hurting at the moment. Sandwiched between the ‘speak no evil’ vendors and the runaway resellers, they are the channel players that have been hung out to dry in this whole sorry mess. Intel and the other vendors always make sure that they get their money, and the recent clutch of runaway resellers are probably sipping sundowners on a beach somewhere in the world.

You have to feel sorry for the distributors. They are carrying the financial burden created by this latest crisis. That’s tens of millions of dollars of bad debt that the Dubai-based distribution community has to absorb. If the bad debts are totally unrecoverable, that is money that comes straight off their bottom line.

Given that distributors work on wafer-thin margins, some would need to do US$100m-plus of extra sales just to compensate for their losses. Even those with insurance now face the tough task of deciding whether to claim or not, knowing that this will mean a massive rise in premiums next year.

I do not like the fact that vendors can wash their hands of this whole affair and runaway resellers can still just disappear from the Dubai market, safe in the knowledge that it is highly unlikely they will ever be brought to justice.

Think about it for a minute. Intel was grappling with massive inventory levels on a global scale in the first quarter and it knew that it had to stuff, stuff, stuff as much as possible to make its numbers and clear a build-up of old SKUs to make room for its new product launches later this year. With the Dubai-based channel being identified as a fantastic dumping ground, Intel did everything in its power to force its distributors to take on more stock at the end of the quarter and simultaneously pushed its IPPs to extend their credit lines and purchase more product than they could handle.

Now, I don’t really have a problem with this, but I remain intrigued by the timing of the latest credit crisis. Intel has a new partner programme scheduled for launch. It also knew all along that its so-called assemblers in Dubai were nothing more than sub-distributors and traders.

The runaway resellers have complained that Intel held back marketing funds that played a role in pushing them over the edge of the pecuniary precipice. Intel counterclaims that the resellers did not submit their claims properly. The resellers insist that they filled in the forms the same as they always have and that they had never experienced any problems before. Now, I’m not one for conspiracy theories but there is still one nagging question in the back of my mind: why did it all happen now?

Intel has played a part in forcing these resellers to flee the market and in the process it achieved its aim of stuffing a significant amount of product into the Dubai-based channel. The major sub-distributors have been forced out of the market and Intel can now launch its new channel programme on a relatively clean slate. In my eyes, the only problem Intel is now facing is rebuilding bridges with its authorised distributors – and that will be no easy task.

Several Dubai-based Intel authorised distributors have already had representatives from Intel visiting them expressing sympathy for their current plight. Now these must be fascinating conversations. Here is how I imagine they don’t go:

Distributor: Oh, that’s OK Mr. Intel. What’s a few million dollars here and there. Us distributors are rolling in cash as you know and we make massive margins. As long as you got your money OK, that’s all that really matters at the end of the day.

Intel: Yes we did. Here’s your targets for the next quarter – and don’t miss them. Make sure that you give this new list of resellers millions of dollars of risky credit to make up for the market void left by this year’s bunch of runaways.

Distributor: Of course. Is there anything else I can do for you today?

Just to reiterate, this is a fictional conversation in case anyone has any doubts. However, on a related note, Gaith Kadir, regional manager at AMD, has already confirmed that one authorised Intel distributor has been in contact with him and is looking to switich its allegiance.

While the distributors are stuck in the middle, they too need to look at the mistakes that they made and what they need to do to make sure this doesn’t happen again. There has been a lot of talk about credit circles and distributors giving resellers ridiculous limits with little or no safety net or reasoning behind the decision.

In my honest opinion, the only safe credit limit for traders in Dubai is zero dollars at the moment. While the regulatory business framework remains as it is, there is nothing stopping a reseller from fleeing the market and leaving behind bad debts. Even if they have traded in Dubai for 20 years, it is difficult to see the logic behind extending massive credit lines to any resellers.

At the moment, credit managers in Dubai have to be a touchy-feely bunch and that is a problem. They are not just looking at cold hard facts and figures to determine a credit limit. They also need to know if the reseller has bought a villa in Dubai, if they have a rental car or have bought one, if they have family here, if they have kids enrolled at school and so on. Seriously, these areas come under consideration when credit limits are being determined. Knowing the reseller and their background is even more important than seeing their accounts, which probably aren’t that accurate anyway.

What I’m saying is pretty simple. All credit is risky in Dubai because there is nothing to stop resellers from running. There is no safe limit and all distributors can do is look to minimise their exposure. I don’t think a credit circle will work. There is too much trading going on between the resellers themselves. The washing machine effect, and the fact that these resellers are also buying and selling grey kit to and from Europe and the Asia-Pacific region, makes it impossible for a credit circle to truly understand the risks involved.

However, the distributors do need to learn their lessons. They have been through this painful experience enough times now. Sales staff need to be incentivised on profits not revenues. It is not a successful sale until the money is in the bank, and sales staff should be carefully monitored in terms of how many days credit (and how much credit) they are giving to resellers.

Distributors know the risks and have seen it all before, yet they continue to over-expose themselves and actually tempt resellers into running by giving them ridiculous amounts of credit. Maybe there is a tendency to play down the risks for those working within distributors, because at the end of the day they all want to achieve sales growth and have the vendors hitting them with big sticks to meet stretch targets.

I think that what is now clear is that distributors pushing hard to hit a rebate or incentive target set by a vendor need to do so without increasing reseller credit lines too far. That vendor rebate worth ‘x’ dollars looks much less attractive when the resellers that took the product scarper leaving behind an unpaid US$6m credit line.

The authorised distribution community did not learn the lesson from previous runaways such as DCS and eMachine. While all the distributors nursing losses have my sympathy for being stuck between aggressive vendors and the runaway resellers, they do need to improve their own internal business processes.

So, in conclusion, the Channel Middle East ‘See No Evil’ Three Wise Monkeys Award goes to Logicom. As a quoted company on the Cyprus Stock, Exchange, Logicom was forced to announce its US$6m-plus bad debt exposure with three Dubai-based resellers. It could have gone to any one of the authorised Intel distributors hit by the crisis, but I’m giving the award to Logicom because it failed to learn its lesson (Logicom was one of the worst hit distributors in previous runaway cases a year or so ago).

Logicom has been hit for six (million dollars that is) by the size of its exposure this time around and must now be seriously considering the benefits gleaned from its presence in the Dubai market. I feel sorry for Logicom but at the end of the day it authorised these credit lines, took on all the risks this represents and ultimately paid the price.

As always, your thoughts and feedback on credit and channel dynamics are more than welcome. Please call +971 4 391 0882 or e-mail stuart.wilson@itp.com.